Whether you’re preparing for your first or your 10th home purchase, it’s crucial to get your loan application ready. But where to start with so many issues to consider? Throw away your dismay and settle in for a long – but exciting – haul!
Firstly, start preparing for your purchase early on in the buyer game. COVID-19 restrictions are seeing some major lenders and banks taking much longer than usual to assess loan applications. But before you even approach lenders, sit down and work out how much you can borrow. Don’t worry – it’s not as difficult as it sounds! Simply add up your typical monthly expenses such as bills, insurance and groceries.
From this sum, figure out how much you have left over in disposable income. This amount will essentially be your borrowing capacity. As well, think about how much debt you’re willing to take on. Interest rates are sitting at an extraordinarily low point so it could be a good time to stretch yourself more than usual to maximise your borrowing bulk.
Lender rules and regulations
All lenders – no matter how generous they appear – are highly conservative. They also all follow the same basic rules when agreeing to home loans. They want the “safest” person possible who is prepared to buy the “safest” house, so they can see all of their loan paid back in good time. What does this mean for you, the borrower? Start with your income. Can you prove you’ve enjoyed long-term stable employment?
Banks love full-time workers – or even part-timers – who’ve stuck to their job for at least six months but preferably longer. Casual employees, lenders will like you more if you’ve been in the one job for a year, while self-employed people should aim for two years of regular ongoing work. Then there’s your dream house. It may be your castle in the sky but again, lenders favour normal houses on the ground, close to the city or in a large regional centre. Think nothing too weird or badly needing repairs or renovations, especially if this is your first home loan application!
Credit and debt
As obvious as it may sound, the more cash you initially splash on your house, the better it will be for you in the long run. You can apply for a loan with just a 5% deposit but always aim for 20% (not forgetting extra purchasing costs that will crop up). This figure is in fact the general rule of thumb for home loans across Australia and as we noted above, it will stamp “safe” on your application. Anything under a 20% deposit will see you slide into LMI (lenders’ mortgage insurance) land. This once-off fee essentially protects lenders with the amount depending on the lender themselves as well as how much the house is worth and how much you need to borrow.
If you’ve been struggling for years to save 20% of your deposit, consider asking someone to be a guarantor. But lenders always want proof you’ve got strong savings behind you. Paying off all your debts including credit cards and personal loans – or at the very least, making regular repayments – will also ensure you’re more appealing. Last, but definitely not least, grab a copy of your credit report and history. And good luck! Think like a lender before you even start house hunting and it will make the road ahead much easier.